GreenTree Hospitality Group Ltd. (NYSE: GHG) Q4 2019 Earnings Call Transcript

GreenTree Hospitality Group Ltd. (GHG) Q4 2019 earnings call dated Apr. 14, 2020

Corporate Participants:

Rene Vanguestaine — Investor Relations

Alex S. Xu — Founder, Chairman of the Board of Directors and Chief Executive Officer

Megan Huang — Director of IT Department

Yiping Yang — Chief Financial Officer

Analysts:

Justin Kwok — Goldman Sachs — Analyst

Praveen K. Choudhary — Morgan Stanley — Analyst

Billy Ng — Bank of America Merrill Lynch — Analyst

Bruce May — UBS — Analyst

Presentation:

Operator

Good day and good evening, and welcome to the GreenTree Hospitality Group Limited Fourth Quarter and Fiscal Year 2019 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to Rene Vanguestaine. Please go ahead, sir.

Rene Vanguestaine — Investor Relations

Thank you, Andrew. Hello everyone, and thank you for joining us today. GreenTree’s earnings release was distributed earlier today and is available on our IR website at ir.998.com as well as on PRNewswire services. As a reminder, we also posted a PowerPoint presentation that accompanies our comments today to the same IR website.

On the call today from GreenTree are Mr. Alex Xu, Chairman and Chief Executive Officer; Ms. Selina Yang, Chief Financial Officer; Ms. Megan Huang, Director of IT Department and Mr. Nicky Zheng, IR Manager. Mr. Xu, will present the company’s Q4 and full year 2019 performance overview, followed by Ms. Huang who will discuss business operations and Ms. Yang will then discuss financials and guidance. They will be available to answer your questions during the Q&A session that follows.

Before we begin, I’d like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as may, will, expects, anticipates, aims, future, intends, plans, believes, estimates, continue, target, is or likely to, going-forward, confident, outlook and similar statements. Any statements that are not historical facts, including statements about the company and its industry are forward-looking statements. Such statements are based upon management’s current expectations and current market and operating conditions and relate to events that involve known and unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company’s control, which may cause the company’s actual results, performance or achievements to differ materially from those in the forward-looking statements. You should not place undue reliance on these forward-looking statements.

Further information regarding these and other risks, uncertainties or factors is included in the company’s filing with the U.S. Securities and Exchange Commission. All information provided including the forward-looking statements made during this conference call are current as of today’s date. The company does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under applicable law.

It is now my pleasure to introduce our Chairman and Chief Executive Officer, Mr. Alex Xu. Mr. Xu, please go ahead.

Alex S. Xu — Founder, Chairman of the Board of Directors and Chief Executive Officer

Thank you, Rene. And thanks everyone for joining our fourth quarter earnings call today, GreenTree’s eighth consecutive quarter of solid operating financial performance. Let’s start with the Slide number 5. By the end of December 2019, we had grown our geographic coverage to 339 cities across China with 3,957 hotels in operation, up 43.5% over the prior year.

Compared with the fourth quarter of 2018, total revenues in Q4, grew 20.4% to RMB289.4 million, net income increased 48.9% to RMB74.5 million and non-core — and non-GAAP EBITDA rose 11.4% to RMB162.3 million. For the full year, total revenues grew 20.6% over 2018 to RMB1.1 billion, net income increased 17.9% to RMB437.8 million and non-GAAP adjusted EBITDA rose 12.1% to RMB594.1 million.

Our operating performance remained solid. Our blended ADR increased 3.6% year-over-year to RMB170, while our occupancy rate had a small 2.2% decrease to 78.2%, that’s primarily due to the consolidation of the Urban Hotels and RevPAR increased 0.9% to RMB133. For the full year, blended ADR increased 3.6% over 2018 to RMB170, occupancy slightly decreased by 1.2% to 80.9% and RevPAR increased 2.0% to RMB137.

We further grew our market presence across China. In the fourth quarter of 2019, we opened 190 hotels and we ended the year with 949 hotels in our pipeline, up 121% year-over-year. We also completed the consolidation of Argyle Hotel Management Group in Q2 and Urban Hotel Group in December 2019, both chains are highly complementary to GreenTree’s hotel portfolio and geographic coverage.

We strengthened our cooperation with the Gingko Education Group, providing entrepreneurial training to graduates, mainly in hotel management. Our own Cosmos [Phonetic] College set up more than 1,700 a targeted training courses to accelerate talent development waiving our company and especially during the prepared for this COVID-19 crisis.

We continued to rollout our F&B concept by branding F&B services into our hotels to turn them into profit centers and attract additional guests for our hotels. Regarding marketing, we are formulating joint marketing programs with several major banks to attract the local corporate clients and high-value business travelers. And throughout the year, we were continuously upgrading the functionality of our IT infrastructure and our mobile-based applications to improve customer experience.

Let’s now turn to Slide 7. I think it is important to say a few words about the impact of COVID-19. Thanks to the government’s efforts to contain the spread. The outbreak is currently under control in China, but the measures that had to be taken including the lockdown of cities, business closures and restrictions on travel disrupted the operation of our hotels. A number of them were forced to close. And a number of hotels were used to house medical staff, volunteers and quarantined travelers. All of this had severely impacted our performance in Q1 2020 and we expect revenues to be down 30% to 35% year-over-year. On a like-to-like basis, revenue for the fourth quarter will be down in the high-30%. That’s excluding the impact from the newly consolidated entities from Urban Hotel Group.

Please turn to Slide 8. All along, our number one priority has been to keep every guest and our staff safe and healthy. To that effect, we took a number of substantial measures. First, we tightened up our already high health, safety and hygiene standard and protocols. Second, we provided a fee waivers and financial support to our franchisees. Third, we created the safe and comfortable isolation space. We also called for self-quarantine employees and guest. And fourth, we provided for free COVID-19 health insurance for our guest.

With this assistance from GreenTree, our franchisees were ready to resume business operations when shutting place was to be lifted. As a result, today, 93% of our hotels are back in operation and occupancy exceeded 50%, up substantially from the low of 21.9% on January 31. And most importantly, none of our guests or employees had been affected by the virus in our hotels.

I am particularly grateful to our franchisees, employees and partners for the hard work in this battle with COVID-19. The combination of our joint swift and tactical response, our support and assistance to our franchisees, our well-trained staff and our sound business model helped GreenTree successfully navigate in these difficult times. In fact, many of our hotels came through with better occupancies and ADR than the comparable stats.

I will now pass the call over to our IT Director, Megan Huang. Megan, please go ahead.

Megan Huang — Director of IT Department

Thank you, Alex. Moving to Slide 10. At the end of the fourth quarter, we operated 3,957 hotels, 43.5% higher than a year ago. 34 of these hotels were leased and operated were L&O hotels and the 3,923 were franchise and managed or F&M hotels, while the mid-scale segment remains the core of our business with almost 65% of our hotels. Last year, we expanded more into both the higher end and economy segments of the market. By the end of 2019, the number of hotels in the mid to upscale and luxury segment increased to 7.2% of the total portfolio and the economy segment grew to 28% with the consolidation.

On Slide 11, you can see that in the fourth quarter, we opened 190 hotels compared to 224 in Q4 2018, down 15.2%. 29 were in the mid to upscale segment, 81 in the mid-scale segment and 80 in the economy segment, 14 were in Tier 1 cities, 37 in Tier 2 cities and the remaining 139 were in Tier 3 and other cities in China. Meanwhile, we closed 41 hotels, nine due to brand upgrade, 20 due to non-compliance with our brand and operating standards and 12 due to property-related issues. So net-net, we added 149 hotels to our portfolio.

Slide 12 shows the growth in our pipeline of new hotels. As you can see, our pipeline increased from 652 on September the 30 to 949 on December the 31, more than double our pipeline at the end of 2018. Around 38% of these hotels are in the mid-scale segment, about 37% in the economy sector and around 25% in the mid to upscale and the luxury segment as we continued our accelerating expansion into the mid to upscale and the luxury segments.

Slide 14 shows that the fourth quarter saw improvements in operating performances across the board. Our F&M hotels occupancy rate dipped slightly from 80.7% to 78.4%, ADR improved 3.9% to RMB169 and the RevPAR increased 0.9% to RMB133.

Slide 15 shows the same operating metrics for the full year. Our F&M hotels occupancy decreased from 82.3% to 81.1%, ADR improved 3.6% to RMB169, RevPAR increased 2.1% to RMB137 and our L&O hotels’ ADR was up 3.1% to RMB211.

Slide 16 shows the quarterly RevPAR trend.,Also RevPAR for our L&O — although, RevPAR for our L&O hotels decreased 1.2% year-over-year to RMB135, RevPAR for our F&M hotels increased 0.9% to RMB133.

With that, I’ll pass the call over to our CFO, Selina Yang.

Yiping Yang — Chief Financial Officer

Thank you, Megan. Please turn to Slide 18. During this quarter, combined total revenues grew 20.4% year-over-year to RMB289.4 million. This growth was primarily due to four factors. The opening of 190 new F&M hotels, improved RevPAR, growth in our loyalty membership program and consolidation of Urban and Argyle Group into our financial statements. Growth was partially offset by the renovation of six L&O hotels.

Total revenues for our F&M hotels rose 20.3% to RMB220.9 million with total revenue for our L&O hotels rose 20.9% to RMB68.6 million. During the year, total revenue rose by 20.6% to RMB1,091.8 million. And total revenue for our F&M hotels was RMB838.4 million, up 21.0% year-over-year and total revenues for our L&O hotels was RMB253.4 million, up 19.2% year-over-year.

Slide 19 shows that total operating costs were RMB92.6 million, up 28.7% year-over-year. This increase of costs, our mainly expansion costs for our F&M hotels, higher depreciation and amortization, higher one-time renovation cost for six L&O hotels and operating costs of Argyle and Urban. Excluding the impact from newly consolidated entities, Argyle and Urban, hotel operating cost of this quarter increased 13.2% year-over-year. For the full year, hotel operating cost was RMB338.8 million, up 23.5%.

Selling and marketing expenses in the fourth quarter were RMB23.2 million, up 66.9% year-over-year. This increase was mainly made up of incentive bonuses and the marketing and other costs associated with brand promotion and with Argyle and Urban. Excluding Argyle’s and Urban’s expenses and extraordinary costs, selling and marketing expenses in this quarter increased 12.2%. And for the year, selling and marketing expenses were RMB85.0 million, up 79.3% from the prior year.

General and administrative expenses were RMB79.6 million, up 212.4% year-over-year. This was due to increased IT research and development cost, legal due diligence expenses, M&A and other consulting fees and Argyle and Urban. Additionally, bad debt provision of investment in Yuzhenglong was accrued in the fourth quarter, considering that Yuzhenglong focuses on providing fast-food to travelers in the railway stations and its business was seriously impacted by the traffic restriction and COVID-19.

Also due to the outbreak of COVID-19, a bad debt provision of rental income from sublease was accrued. Excluding the bad debt provision, G&A from Argyle and Urban and one-time fees, our G&A expenses in this quarter increased by 21.1%. G&A expenses for the full year were RMB185.0 million, up 94.2% over the year of 2018. Overall, combined total operating costs and expenses for the quarter grew 67.9% year-over-year to RMB198.5 million. Excluding Argyle and Urban, provision for bad debt and one-time fee, our combined total operating cost and expenses increased 12% compared with one year ago.

On Slide 20, gross profit grew 16.9% year-over-year to RMB196.8 million. Gross margin decreased slightly from 70.1% to 68.0%, net income increased 48.9% to RMB74.5 million and net margin improved from 20.8% to 25.8%. For the year, gross profit grew 19.3% year-over-year to RMB741.6 million and net income grew 17.9% year-over-year to RMB437.8 million.

On Slide 21, you can see that adjusted EBITDA increased 11.4% year-over-year to RMB162.3 million and adjusted EBITDA margin decreased to 56.1% and our core net income increased 15.8% to RMB129.9 million and core net margin was 44.9%. For the year, adjusted EBITDA increased 12.1% year-over-year to RMB594.1 million with the margin of 54.4% and core net income increased 16.7% year-over-year to RMB482.7 million.

Now turn now to Slide 12. Net income per ADS, basic and diluted, increased 51% to RMB0.75, that’s equal to $0.11, while our core net income per ADS, basic and diluted non-GAAP increased 15.1% to RMB1.27, that’s equal to $0.19. For the year, net income per ADS, basic and diluted, improved by 15.8% to RMB4.34, equal $0.62, while our core net income per ADS, basic and diluted non-GAAP, increased by 13.4% to RMB4.73, that’s equal to $0.69.

Let’s now look at Slide 23. During this quarter, our operating net cash inflow was RMB118.5 million. As of December 31, we had cash and cash equivalents of RMB1.8 billion. Additionally, thanks to our lenders, we have RMB330 million of untapped low interest credit line to allow us to assist our franchisees.

On Slide 24, as Alex mentioned, COVID-19 had a significant impact on our business. So as a result, we expect total revenue to decline 30% to 35% for the first quarter of 2020 and to decline 10% to 15% for the full year 2020 compared to 2019. However, we still anticipate that we will pay our cash dividends of $0.15 to $0.25 per ADS in the year of 2020.

We had received inquiries from some of our investors regarding our legal structure. So I would like to clarify that GreenTree had been from the day one a wholly-owned foreign enterprise in China. And as such, our shareholders have direct ownership in all our operating entities, except the 168.com that cannot be owned by foreigners on a Chinese floor. However, 168.com account for only 1% of our revenues.

That concludes our prepared remarks. Operator, we are now ready to begin the Q&A session. Thank you.

Questions and Answers:

Operator

[Operator Instructions] The first question comes from Justin Kwok of Goldman Sachs. Please go ahead.

Justin Kwok — Goldman Sachs — Analyst

Hi, Alex and everyone. Thanks for taking my question, and I hope everyone is safe, healthy and evening. Perhaps I’ll get off with three questions. I’ll just lay them out now and then you can just take it one by one. The first question is, I want to get a sense on how management derived the 10% to 15% decline in the full year revenue in terms of what kind of ramp up in your operations into Q2 or into the second half of the year that you are anticipating? Some color on the occupancy or RevPAR changes will be very helpful? And at the same time, are you anticipating further franchisees, waiver or support into the rest of the year or you do expect the franchisees number to move back to normal side? So that’s the first question on how you get to the revenue growth.

The second question is on the cost side. So it seems like you’ve got some one-off cost related to the M&As and the one-off expenses. So your margin was a decline on year-over-year basis. Can you just kind of walk for us some pro forma numbers? If you exclude this one-off, what would the margins be? And into — like 2020, given now you have the full year number, with this new acquisition where would be margins kind of roughly at?

And the last one is on the M&A. Can you remind — I’m not sure whether you mentioned it in the call, I might have missed it. What would be your capacity now for M&A as of the end of the year? And what kind of targets you’re looking — I mean what kind of opportunities you’re looking at this stage given potentially there is some liquidity squeeze event in China? Are you turning even more or are you seeing more aggressive targets you can do now given now you started off with very good financial position into the year? I will stop here. Thank you.

Alex S. Xu — Founder, Chairman of the Board of Directors and Chief Executive Officer

Thank you, Justin. This is Alex. And likewise, the best and be safe everybody on the phone call. With regard to how we arrived to 10% to 15% guidance for the year, and that’s based on our ramp-up period. We think there is a continued ramp up period here in the second quarter and the third quarter and all the way to the fourth quarter. So the recovery will not be immediately like the 10%. It takes the same time as it go down to go up, it takes a little bit longer. But the detailed number, I’ll have Selina to address her rationale arriving at 10% to 15%. Selina?

Yiping Yang — Chief Financial Officer

Thank you, Alex. And thank you for Justin’s question. The full year’s forecast was made by adding up quarterly forecast. And for each quarterly forecast, that’s driven by two major operational metrics; number of newly opened hotels and growth of RevPAR. First quarter we experienced the most difficult time and with our occupancy, that’s about 60 — that’s about 62% of our normal conditions. And as you can see, by the end of March, our occupancy rate had hit more than 60%. And our — afterwards, the occupancy rates climbed up and at 10% it was under good control.

So during the February and the March, our occupancy rates doubled from the lowest level, and that’s why we had exceeded it more than 50%. And in our forecast in the second quarter, our occupancy rates continued to recover gradually. And by the end of the second quarter, the occupancy rates is more likely to exceed 80%. And in the third quarter, the occupancy rate will remain at the highest level of the full year 2020, but because last year’s third quarter is also the hottest season of the full year. So that means our year-over-year growth [Indecipherable] there is still year-over-year growth decrease, but the absolute value will be the highest of this year.

And in the fourth quarter, in our forecast, occupancy rate will resume to the same level as the fourth quarter. So that means year-over-year decrease — no decrease anymore even be a little higher than the last year’s occupancy rates. And during that whole year, our ADR level remains at nearly the same as last two years. That’s our experience for the first quarter of 2020. So accordingly, the revenue will reach the same level as one year goal until the fourth quarter. So we think we — our forecast is very conductive. And in line with these assumptions, we achieved the decline of 10% to 15% of revenues for this year.

Alex S. Xu — Founder, Chairman of the Board of Directors and Chief Executive Officer

Okay. Justin, let me add one more thing. And even though the first time I looked the number, I find if that that is a little bit probably aggressive, but later we looked at it because we also have the addition of new hotels adding to the pipeline. So — being opened, especially we have accumulated them more from the year-end of last year, and you can see our pipeline has been doubled from the year ago, the Q4 2018. So with those hotels being opened and put it into the actions, so I believe that overall, we should be able to achieve that number.

With regard to your second question about — the second part of this question whether we’ll consider additional fee waivers. And so our fee — basically we waived certain fees for our franchisees and that waiver is going to be finished and terminated, expires with the lift of the shut-in place. And so we — I think we have been pretty lucky. In the past year or two, we have always commenced our franchisee to be conservative and not to be too aggressive. So a lot of our franchisees’ position, financial position wise are very good. So we expect our franchisee will recover also very rapidly from the crisis.

So with regard to the second question, the cost side, and there is a few issues there. I will have Selina to give the detailed and visit each item, roughly the numbers. But our core, pro forma core cost really have not increased that much. And we’re trying to be sensitive to the last year, especially the tougher year because there is so many brand popping up in China and some of them already closed down, and — but there is the talent acquisition. So the overall cost, including the property and there was a rent costs are all rising, they were rising pretty fast towards the end of last year. So I agree that there will be a resistance for both our development as well as our cost.

We also have another element, income that really we did not calculate in the core EBITDA, core net that is our interest income because we finance certain operations to the key and the performing the key and the best franchisees. And so we think that’s part of the really good combination of the tools and both will get some good income, stable income for the company as well as supporting the franchisees to expand who is qualified and those quality franchisees. But I believe — I don’t believe the interest in all those income are included in the normal operation — operating incomes. And that itself also has an element of legal underwriting additional cost. In current, that’s part of the legal underwriting cost in addition to the acquisition, the margin acquisition cost.

And as Selina also mentioned to you, we have to write-off because we have a small, I think that we have a mezzanine loan, we have a finance loan to one of the brand of the catering, to the railroad food catering. And due to the crisis, I think the food businesses over there suffered. So our finance department, our auditor decided to write it off.

So detailed number, I will leave that to Selina. Selina?

Yiping Yang — Chief Financial Officer

Thank you, Alex. Justin, can you — may I ask — can you repeat your question for the detailed number so that I can clarify this question?

Justin Kwok — Goldman Sachs — Analyst

Yeah. Maybe just quickly on — given your adjusted EBITDA margin was down year-over-year, obviously I think Alex also mentioned some one-off items that include writing off something and then also the M&A costs, expensing on these. So can I just check on a like-for-like basis or core basis what should be the margins. And actually in 2020, what will the margin outlook be?

Yiping Yang — Chief Financial Officer

Thank you. Thank you. Yes. Justin, as I just explained, I guess there is two reasons. First one is the bad debt provision due to the outbreak of COVID-19. So that is the 5% — that is about 4% impacted for the EBITDA margin. And the one-time fees that is about 1% of the impact of the EBITDA margin, yeah.

Justin Kwok — Goldman Sachs — Analyst

Great. Thank you. Just the last part of the question is about M&A…

Alex S. Xu — Founder, Chairman of the Board of Directors and Chief Executive Officer

See Justin — correct, correct. The third question. We want to give you a color on that. Last year what happened is that we generated an operating cash flow roughly about RMB500 million, it’s a ballpark number, so don’t quote me. And so we have made roughly RMB1.2 billion investment. That’s variety consist of; we paid a dividend and we also invested in some key strategic located property hotels near the railway station. And then we also made two investment actually in the — one is the Gingko, one is our New Century Kaiyuan Hotels. And then the first portions we made also the two of the merger, acquisition with the Argyle and with Urban. And finally, we made a number of invest — the financial assistance to franchisees. So combined, we have RMB1.2 billion. I think all of them are producing great results, were producing great results for the company’s future.

And even with — so with that, our cash balance I think dropped from RMB2.3 billion to RMB1.8 billion because we tapped into the cash we have on the current situation. I think we’re glad we were not that aggressive as last year in both in the property development as well as in hotel development as well as the acquisitions. And so this gave us a still and resource to evaluate. And we are currently evaluating several smaller and complementary geographically and brand wise opportunities.

And yes, we are going to systematically evaluate, but we also think that the China and overseas are kind of a very different because I think that our system, economic system and the support that we receive over there, a lot of — I think it will be a while I think before we see great opportunities or service. I think right now there are some, but I think still people are looking to see whether there is a recovery speed. If the recovery speed is slower, there will be more — I do believe there will be more opportunities out there. But we want to be disciplined as always and we also want to be disciplined because a lot of our shareholders even expected some of the dividend. So we looked at our income for this year, the revenue and expense and we looked at the cash flow. We think we are also able to continue to stick to our dividend policy. So that’s the — and I also welcome everybody online because you have — you may have a lot of leads to recommend to us and if there are targets that can create win-win situation for us. So Justin, thank you so much for all those wonderful questions.

Justin Kwok — Goldman Sachs — Analyst

Thank you.

Operator

The next question comes from Praveen Choudhary of Morgan Stanley. Please go ahead.

Praveen K. Choudhary — Morgan Stanley — Analyst

Thank you very much for taking my question. Hi Alex. Hi Selina. Thanks for the presentation and answering those questions. I have two questions. First one is, could you talk about the current demand situation after the coronavirus outbreak, especially in March or in April? I’m trying to understand what part of the occupancy increase is coming from business versus leisure. Also I want to understand how much is this for the occupancy increases because of the local demand like people who live in the same city, because we are seeing very little train increases or the transportation helping people to go from one place to another. So just want to understand what’s driving that demand come back and — so that we can understand when we did eventually get to normalize?

And the second question is more related to the Urban and Argyle acquisition. I wanted to understand a lot more about Urban. We thought that they had 700 hotels. So question is, do they have the same franchise rate, take rate of 7%, 8%? What percentage of the pipeline increase is because of Urban? So anything you can talk about Urban impact on both pipeline, revenue as well as EBITDA for fourth quarter so we can model it properly that will be very useful? Thank you so much.

Alex S. Xu — Founder, Chairman of the Board of Directors and Chief Executive Officer

Thanks, Praveen. The demand, I’ll elaborate a little bit and then Selina can add on top of that. And you are correct by looking at the traffic. A lot of our demand are continuously to be for those travel — for those workers resume back to the job to the factories and to the companies. So that’s created the major demand for our hotels. And that is one of the reasons a lot of our hotels have so called the self-quarantine room. That is when you travel from different cities and you should — typically the company will recommend you stay in the place for 14 days. And there are also some local demand that we call the intra-province, intra-cities. And so those are the two primary demand for our hotel.

So leisures have not yet, other than in certain leisured locations we know. For instance, you probably read a story in Guangzheng [Phonetic] when the government opened the resort, they had no fee and then they also really flooded with guests in our Foshan [Phonetic] hotels have full occupancy. And then I think [Indecipherable] were crowded and there were restrictions and occupancy dropped. And so the leisure side I think will be a while and then more comfortable of travel or even government will be encouraging that. I think that’s basically a policy and behavior both of these issues.

And so with that, I will ask whether Selina — Selina jump in if you have anything to add. And then the second issue regarding the Urban and also Argyle’s consolidation, I will ask Selina to address it to you. But basically, Argyle, I think the five star luxury sector is more competitive. And the earnings, we really haven’t yet seen the significant earning or EBITDA contributions for the Argyle. And so we are still trying to develop that major presence in China and we have a good faith that the team is working very hard under Kevin Zhang’s leadership. And it is just a very, very — the five star in terms of — because that’s primarily fighting the new developments that’s slowing down, fighting the existing inventories. And so everybody has a financial package and franchise term for the hotel owners.

Argyle, we consolidated in December. And so the impact is not much there yet because it’s only a fraction for the quarter. Anthe Argyle has a lower margin and has a lower — relatively lower occupancy. And so this is all part of our acquisition that we will continue to hope to work and so we can improve the brand standard and increase occupancy and increase the ADR. And the exact — I will leave Selina to address that to you. Selina?

Yiping Yang — Chief Financial Officer

Thank you, Alex. Yeah, I’d like to share some observations with Praveen and everybody. And for the first question, if we analyze occupancy rate in terms of the tiers breakdown, we find that in the Tier 1 cities the occupancy rate dropped greatest. And for the Tier 3 and lower cities, occupancy rate was more stable than any other cities. And also if we analyze occupancy rate in terms of the brand segments, we find that middle scale, the middle scale segment occupancy rate has remained mostly stable than any other brand segments. And the next one is economy segment. And for the middle to upper scale and the RevPAR decrease So was the highest.

So that is — and the second is from the operation viewpoint, we find most of our guests are contributed from the local guests for our bigger client and big clients, I mean the enterprises surrounding our hotels. And the travelers between provinces are ramping up gradually in March and before, so we spent a percentage of the [Indecipherable] guests increasing gradually.

So for second question, for the contributions from Argyle and Urban, we find that Argyle — actually the net income from Argyle was negative. So there has been — there was no contribution from the Argyle’s data. And Urban, we consolidated Urban data since the December of the fourth quarter of last year. So it’s contribution was minor. And in the forecast of 2020, in our model, the contribution of Argyle and Urban was less — the revenue contribution was less than 3% and the EBITDA contribution — and we didn’t anticipate the EBITDA contribution to our forecast. Thank you, Praveen.

Alex S. Xu — Founder, Chairman of the Board of Directors and Chief Executive Officer

In terms of — Praveen, another thing that you mentioned over there, out of the pipeline, about 200 — roughly about are from the Argyle, 70 — 70 from Argyle. So the pipeline will carry a longer time because sometimes it takes years for our hotel and the four star, five star level to mature. And then about the 200 from Urban.

Yiping Yang — Chief Financial Officer

Yes, yes. Correct. Sorry, I missed this question.

Alex S. Xu — Founder, Chairman of the Board of Directors and Chief Executive Officer

It’s okay.

Praveen K. Choudhary — Morgan Stanley — Analyst

That’s very helpful, Alex. Thank you very much, Selina. And be safe, hope everything is fine there. Thank you.

Alex S. Xu — Founder, Chairman of the Board of Directors and Chief Executive Officer

Yeah. Please call Selina if there is any information we have not made it clear because we would really like to be very transparent for all of the transactions that we made. And therefore, trying to be really disciplined in terms of underwriting, setting up the price, setting up the acquisition structure. Thanks, Praveen, and you do the same.

Operator

The next question comes from Billy Ng of Bank of America. Please go ahead.

Billy Ng — Bank of America Merrill Lynch — Analyst

Hi. Good evening, and thanks for taking my questions. I have some follow-up questions basically. I think can you tell us more about your current occupancy, I mean in terms of the distribution. How — like when we get to 50% or 60% occupancy, do we see some of them at very high occupancy, but some of them are still at like let’s say 10%, 20%? The reason I want to ask that is I do want to see how many of the franchisees are still loss-making at this point?

Alex S. Xu — Founder, Chairman of the Board of Directors and Chief Executive Officer

Okay. Selina, do you have that number to show it to Billy? Billy, that’s a good question. I do not know. At least, I do not know that Selina will have that number, but more than happy to share. Actually she didn’t have that in front. First of all, because I looked at the number, I didn’t do a trial. It is really spread, widespread. So there are hotels who are running very high occupancies due to the certain demand, but there are also hotels running — we have three — we still have 7% that had not yet opened because the condition of the local community.

And so for the — so not every hotels are uniformly. So there is widespread in terms of their performance. And certain cities had the hit the hardest. So I think that is still pretty much close down and in some provinces not yet. And they are seeing the business. We have some hotels have running at 80%, 90% occupancy already. And so — but I think the next wave is going to be a piece of — we think the people’s confidence is going to be correlated with the measurement — the measures the government will take with the next stage in how comfortable they are to lift the shut-in place for each cities and provinces.

So Selina, please add your number if you have?

Yiping Yang — Chief Financial Officer

Thank you, Alex. Yes. Indeed, this is very good question because we observed that occupancy rates for those hotels in operation will averagely distributed. That means, for example in Tier 1 cities, we observed the occupancy rate was about 43.4%. That was the lowest amount for this tier cities. And in Tier 2 cities, the occupancy rate was above 46%. That will be higher than that hotels in Tier 1 cities. And in the Tier 3 and the lower cities, the occupancy rates was the highest, and that is above 52%.

So average is speaking. We find that occupancy rate about all the hotels was relatively stable, yet was not impacted by only a few portion of the highest occupancy rate of the account. Yeah, that is what we observed, yes. And then we have talked about if we analyze occupancy rate in terms of brand segment, we find that the middle scale hotels achieved the highest occupancy rate than the middle to upscale hotels and the economy hotels. And also that is averagely distributed.

And the fourth question, how that is franchised, starting from the last, and we are so sorry, we haven’t got the very exact, an accurate number. But for our past experience, our breakeven point for most franchised in the normal condition was about 50% to 55% of occupancy rate. So that means by the end of the first quarter most of our franchisees are reaching — were reaching or has reached the breakeven point. So that’s why we have confidence in the quarter and most of our hotels and franchisees will make the profit, starting from the last. Thank you for the questions.

Billy Ng — Bank of America Merrill Lynch — Analyst

I see. And can I follow-up with just in terms of the — you mentioned Tier 3 to — Tier 3, Tier 4 cities outperformed Tier 1 cities specifically. Why is that? And also, can you tell us a bit more in terms of the self-imposed quarantine demand? A lot of people, as Alex described, when they get back to work, they need to stay at a separate place for safety or healthy reasons. And roughly speaking, how much of the demand is related to that and how much is we see a bit of normalized business travel demand?

Alex S. Xu — Founder, Chairman of the Board of Directors and Chief Executive Officer

I believe that — okay. Selina, go ahead.

Yiping Yang — Chief Financial Officer

Thank you, Alex. Yeah, I’d like to share some experience on the first quarter. I think one reason was due to the guest to stores because we know that Tier 1 — in Tier 1 cities, most of the guests in the past — most of the guest came from the long distance travel — business travelers. But in the crisis, most of our long-term — long distance travelers have no chance to travel anymore because of the traffic restriction given by our government to protect our safety. So nowadays, most occupancy rate was contributed from the short distance customers and also some surrounding and community and guests.

So that’s why the hotels in Tier 3 and lower cities achieved a more stable occupancy rate than that hotels in the Tier 1 cities. And therefore, [Indecipherable] because we have mentioned, some of our hotels, the occupancy rate came from the workers returned back to their work positions. And that’s — and those bigger enterprises were distributed not only in big cities, but also distributed in some Tier 2 and Tier 3 and Tier 4 cities. And for some big sized enterprises, as we know, some big sized enterprises has moved up from Tier 1 cities to Tier 3 and the lower cities. That’s why most of the workers returned to their work position and that contributes to our occupancy rate in the hotels in Tier 3 and other cities. So that we observed just the first quarter’s operation viewpoint. Thank you, Alex.

Alex S. Xu — Founder, Chairman of the Board of Directors and Chief Executive Officer

My — sorry, I did not get the number. I don’t have the exact number. By my understanding, we don’t clearly in the system to mark every single room and special types of room called self-quarantine room. And so most of the — we are right now having a new health, safety and hygiene protocols. We treated every guest coming in that are self-quarantine. So we also limited the access — limited our contact between the hotel employee and our guests. So — and we also send the — during the period, and we send the food to the room and then we clean separate schedule. And so we’ve almost treated every room over there as if it has a self-quarantine. And so the majority of them are for travelers and regardless whether they are required by the government or not, by the local businesses or not.

And secondly, I just want to emphasize Selina’s point. That is the internal province traveling right now I think is a major portion of the business. And the cross provincial traveling, right now is still less unless you go back to work with the so-called — I think there is a proof as you come from the countries — from the factories or from the companies then your complex administrator will take that and will allow you to travel with us in the past. I think that restriction is lifted, but cross provincial traveling right now is still I wouldn’t — I’d say, slow and are not totally encouraged. And very soon, I think hopefully the rest of the world, this coronavirus crisis will be contained that will lift the concerns of the China government, of our government then this travel ban or travel advisory will be less.

So I believe that’s the — what our assessment. But I do — on top of that, I want to make another comment regarding the demand. We also from the GreenTree side, our demand is not only the travelers, but also demand for franchise. We believe the demand for franchise, demand for this year will be healthy. And because we have more independent hotels or some other branded hotel owners, may need a total reexamine of their cost structures and may need to find a hotel operator who is able to help them financially.

So our first quarter, our development speed actually considering the shut-in place is pretty high. And our first quarter development is very high speed from my point of view. And that we developed more than three digit numbers of the hotels and that’s also because of the restructuring of the development. I think last year, last Q4, couple of — a number of factors in the Q4 and we didn’t open as I planned, scheduled this a little bit disappointing to the management to my side, we acknowledged that because we are about short of 50 due to several reasons, and I just read the property cost, development cost really very high. It takes a little longer time. Secondly, the spring festival is going very faster than before. So people in the past try to open, to speed up and they have to slow down taking that into — take that into consideration, open probably afterwards.

And so — and third due to many emerging brands. So we should be able to more than make up the shortage for the Q4 so that we see the demand, really glad to see the demand coming back and pretty strong for our hotel brand. And so as I mentioned to you that we actually in the first quarter even in light of all the shut-in place, we didn’t have — we couldn’t travel. So still you just let the GreenTree alone we developed more than what we expected. And so that’s the other demand. So we think that we have a healthy — we really have a stable and healthy environment for GreenTree, for us to develop new hotels for this year and we think the economy is fundamentally strong. The government is actually making those smart policies. And we can have another strong performance.

Operator

If I may, the next question comes from Bruce May [Phonetic] of UBS. Please go ahead.

Bruce May — UBS — Analyst

Hi. Thanks, Alex and Selina for taking my questions, and I hope everyone stay safe and healthy. I only have one small question. So in terms of the speed of recovery, so in which city tier have you seen faster improvement in business travel demand so far in April? And which hotel segment do you expect to pick up more rapidly in the future? Thank you.

Alex S. Xu — Founder, Chairman of the Board of Directors and Chief Executive Officer

So for the — I will address and then Selina you add. As Selina pointed out, Bruce, we think that the Tier 3, Tier 4 cities, those recovery should be the quickest because the intra-provincial travelers is pretty much I think that already started and cross-provincial traveling is going to be a later stage and the shorter distance travels happens first.

Secondly, the hotels we have near the railway stations and near the hospitals, near the schools and near logistic centers, those are the ones that we see them coming back very quickly and will recover the quickest. And there will be the leisure or any kinds of a higher concentrated property and leisure-related hotels probably the last.

Do you have anything else to add, Selina?

Yiping Yang — Chief Financial Officer

Thank you, Alex, and thank you for nice question. Actually, we think that the hotels in the Tier 2 and Tier 3 and other cities will recover more quickly than that other hotels in the Tier 1 cities not only from the viewpoint of the occupancy rate, but also from the ADR viewpoint, because we observed that the room rate in Tier 3 cities will be a growth with the minus. And that means that in Tier 1 cities, the decrease of ADR was the highest. And it is a same trend as occupancy rate in Tier 1 cities. And in Tier 2 cities, the ADR and the decrease of ADR was little better than that of Tier 1 cities. And in Tier 3 and other cities, the room rate was nearly at the same as the last year. So that means, nowadays more people are concerned about the room rate, especially for the business travelers and short distance travelers. And so that’s why we think the hotels in the middle scale and in the Tier 2 and Tier 3 cities will recover more quickly than other hotels. Thank you.

Bruce May — UBS — Analyst

Okay. Thank you, Alex and Selina.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Selina Yang for any closing remarks.

Yiping Yang — Chief Financial Officer

Thank you, operator. In closing, on behalf of the entire GreenTree management team, we thank you for your interest and participation in today’s call. If you require any further information or any interesting lifting out in China, please don’t hesitate to contact us. Thank you everybody.

Operator

[Operator Closing Remarks]